MORE than half of businesses in Scotland have experienced “little to no impact” from the Scottish Government’s income tax policy, according to new research.
It comes after both the Tories and Labour criticised the policy, claiming it would have an unfair impact on working Scots.
The Fraser of Allander Institute’s latest Scottish Business Monitor (SBM) for Q2 2024, published on Tuesday, found that 57% of businesses in Scotland have experienced little to no impact from the policy.
Changes to the income tax policy were introduced by the Scottish Government earlier this year, meaning people in Scotland earning more than £28,867 pay more income tax than their UK counterparts.
A 45% advanced rate was also introduced for those earning between £75,000 and £125,140.
According to the Scottish Fiscal Commission, the changes mean that those earning £30,000 will pay an additional £11 per year than they would in England, while people on £40,000 will pay £111 more annually.
At the time, the policy was met with criticism from Scottish Labour leader Anas Sarwar, who said that “Scots are paying more and getting less” despite having previously campaigned to have a Scottish income tax rate of 50% for earnings over £100,000.
Meanwhile, John Lamont, Scottish Tory MP for Berwickshire, Roxburgh and Selkirk, claimed that people were struggling to “justify remaining in Scotland when they’re paying so much more tax compared to the rest of the UK”.
However, research published in April by HMRC found that more people are moving to Scotland rather than leaving after changes to the policy were introduced.
In the SBM survey, conducted in May, the institute asked more than 300 businesses a series of questions relating to firms’ views of the impact on their business.
It found that 17% of respondents experienced a “fair amount” of impact, while another 17% said that the policy had a “significant” effect on their operations, meaning around a third (34%) in total felt an impact.
The research found, however, that 28% of firms reported no impact from the policy, while a similar proportion (29%) felt only “a little” impact and the remaining 9% did not respond to the question.
Professor Mairi Spowage, director of the Fraser of Allander Institute at the University of Strathclyde, said: “These results shed light into the ongoing debate on how tax policies are affecting businesses and the broader Scottish economy.
“While most firms report minimal impact from the current tax policy, a notable minority are experiencing challenges, especially in areas like staffing and investment.
“This divide underlines that taxation is a particularly contentious issue, and ties into the discussion happening across Scotland about how diverging rates of income tax are affecting the economy.
“As the Scottish Budget approaches on December 4, the Deputy First Minister will need to weigh whether the current tax balance is right – or if there’s any scope for change.”
Key issues highlighted by firms included recruitment and retention, with many businesses saying they are struggling to attract and retain talent.
They cited higher taxes as a cause of employee dissatisfaction, which they say is leading to increased wage demands and reluctance to relocate to or remain in Scotland.
Some businesses perceive Scotland’s higher tax regime as a competitive disadvantage compared to the rest of the UK, with a few considering moving operations or investments south of the border.
And a number of respondents reported raising wages to compensate for the reduced take-home pay of employees due to the higher tax rates.
However, some firms said they felt no impact from the changes while others recognised that the higher tax rates play a role in funding public services in Scotland, such as healthcare and education.
Construction emerged as the most affected sector, with 27% of firms reporting a significant impact, whereas the Wholesale & Retail sector saw the least impact, with 34% of businesses indicating no impact.
A Scottish Government spokesperson said: “Scotland has the most progressive income tax system in the UK, protecting those who earn less and asking those who earn more to contribute more.
“This additional income of around £1.5 billion helps support for a more comprehensive set of services in Scotland compared to the rest of the UK, including free prescriptions and free university tuition.
“The First Minister has been clear that driving economic growth is a key priority and ministers are committed to working right across the economy, not least the business community, to maximise the huge economic opportunities that lie ahead.”
